1) What is the firm's WACC for Case 1?

2) What is the firm's WACC for Case 2?

3) What is the firm's WACC for Case 3?

4) Which case corresponds to the optimal WACC? (Case 1, 2 or 3)

5) What is the corresponding D/(D+E) ratio?

6) Why does minimum WACC correspond to an entity's optimum leverage for all stakeholders?

a) Minimum WACC minimizes the project's negative cash flows.

b) Minimum WACC corresponds to an optimal D/(D+E) ratio

c) Minimum WACC drives down the present value of negative cash flows

d) Minimum WACC maximizes the present value of each future cash flow.

For 7-9

SSI is for sale for the price shown below (for 100% of the firm's stock). You would like to buy the firm. As part of the purchase transaction, you will optimize SSI's capital structure. IE: you will use some of your cash to fund the purchase, and have the firm take out a loan on the purchase date to fund any remaining amount. Purchase price of firm (100% of the firm's stock): $200.00 MM

7) Based on your above analysis, what is the D/(D+E) ratio that you will set for the firm?

8) How much of your cash will you use to fund the purchase?

9) How large is the loan the firm will take out to fund the rest of the purchase?

Steady State Inc. (SSI) is a profitable company that has stayed the same size for the past few years (as measured by its Balance Sheets, Income Statements and Cash Flow Statements). You expect SSI to maintain this steady-state condition into perpetuity, except for possible changes to its capital structure. This simple firm has no accruals, no PPE or etc, so for any given year its NI = FCF to owners. The firm is debt free. Given the below data, find (as requested) SSi's optimum WACC, re, rD and D/(D+E) ratio. Choose among the three cases listed. Notes Company is debt free. Annual Income Statement Revenue - SGA -Interest =EBT - Tax = NI = FCFE $MM UON $193.60 ($154.88) $0.00 $38.72 ($17.42) $21.30 $21.30 FCF = NI because of no accruals, PPE, etc. Rates and other constants PRF IM 4.00% 7.00% 1.10 45.00% BU Trate Variable Ratios and Rates 3 D/(D+E) = wo Case 2 45.00% 7.50% 11.00% 0.0% 0.00% 9.00% ro 80.0% 14.00% 18.00%